UK growth goes into reverse

Britain’s economy unexpectedly shrank the most in more than a year in the December quarter, as construction slumped and the coldest December in a century hampered services and retailing.

Gross domestic product fell 0.5 per cent after increasing 0.7 per cent in the previous quarter, the Office for National Statistics said in London on Tuesday. Growth would have been “flattish" without the impact of the weather, it said.

The pound dropped after the report, which shows the UK recovery had faded even before Prime Minister
David Cameron
’s government increased sales tax to 20 per cent this month, which may dampen consumer demand this year.

The data may reinforce calls for the Bank of England to hold off increasing its key interest rate to curb inflation.

Governor
Mervyn King
, who leads the bank’s divided policy committee, was set to deliver his first ­public speech of the year last night.

“The economy is underheating, not overheating," VTB Capital economist and former Treasury official Neil Mackinnon said.

“An interest-rate increase would easily push the economy back into recession and would be a major ­policy error."

The pound fell as much as 0.9 per cent against the US dollar after the data release and was down 1.2 per cent since yesterday, the most since December 15. UK 10-year gilts rose and the yield fell to 3.58 per cent.

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The GDP drop is the biggest since the second quarter of 2009, when it fell 0.8 per cent. The statistics office said the data was “more liable to ­revision than usual". None of the economists in the survey forecast stagnation or contraction. From a year earlier, the economy expanded 1.7 per cent.

While these are “obviously disappointing numbers", there was “no question of changing" the fiscal plan, UK Chancellor of the Exchequer
George Osborne
said. “We will not be blown off course by bad weather."

His opposition counterpart, Ed Balls, said in a statement that the figures were a “matter of great ­concern".

“George Osborne and the Treasury must urgently rethink their reckless plan to cut the deficit too far and too fast and start putting growth and jobs first," Mr Balls said.

Britain is the first member of the Group of Seven nations to report official growth data for the December quarter. The depth and breadth of the global recovery will be a focus for 2500 political, business and academic leaders meeting at the World Economic Forum which began in Davos, Switzerland, yesterday.